Notice Clause: “On or as soon as reasonably practicable”

Although it is customary to use
various expressions in modern commercial agreements, very few such agreements
have been the subject matter of interpretation before Indian courts. Hence, it
is essential to draw inspiration from jurisprudence being developed elsewhere. One
such development relates to a decision rendered by the English High Court in
December 2014 in Goldman Sachs
International v. Videocon Global Limited and another (which came to my
attention only recently).

Facts

Goldman Sachs (the Claimant)
brought an action against two Videocon companies (the Defendants) under a
series of ISDA Master Agreement pertaining to currency swaps. The agreement was
terminated on 2 December 2011 due to the inability of Videocon to meet margin
calls. By way of a notice dated 14 December 2011, Goldman Sachs set out calculations
of the sum it claimed from Videocon under the agreement. In the first round of
litigation, a judge held that Goldman Sachs had failed to provide sufficient
details as to how the claim amount had been calculated. Thereafter, over two
years later, on 7 March 2014, Goldman Sachs provided further details regarding
the manner in which it arrived at the calculations.

The short question that arose for
consideration before the judge was whether the notice (provided in two stages
above) was in compliance with the requirements of the relevant clause of the
ISDA Master Agreement.

It would be useful to set out the
relevant extracts of the clauses from the judgment:

“(d) Calculations.

(i) Statement.
On or as soon as reasonably practicable following the occurrence of an Early
Termination Date, each party will make the calculations on its part, if any,
contemplated by Section 6(e) and will provide to the other party a statement
(1) showing, in reasonable detail, such calculations (including all relevant
quotations and specifying any amount payable under Section 6(e)) and (2) giving
details of the relevant account to which any amount payable to it is to be
paid. …

(ii) Payment
Date. An amount calculated as being due in respect of any Early Termination
Date under Section 6(e) will be payable on the day that notice of the amount
payable is effective … Such amount will be paid together with (to the extent
permitted under applicable law) interest thereon (before as well as after
judgment) in the Termination Currency, from (and including) the relevant Early
Termination Date to (but excluding) the date such amount is paid, at the
Applicable Rate. …”

Issues and Ruling

In order to sustain the claim,
Goldman Sachs had to establish that the notice as provided was effective, so as
to compel Videocon to perform its part of the contract. The judge bifurcated
the legal issues into: (i) the timing of the notice, and whether it was
delayed; and (ii) the effect of a delayed notice regarding the details of the
calculation.

(i)Timing of the notice

The question for consideration was
whether the second notice of details was delivered “on or as soon as
reasonably practicable” following the Early Termination Date. On this, the
judge held to the effect that the notice intended by Clause 6(d) included not
just the calculation but the details as well. Moreover, there was a delay in
the provision of the details. The judge observed:

8. In my judgment
the Defendants plainly have a real prospect of establishing at trial that the
second notice was not delivered “on or as soon as reasonably
practicable” following the Early Termination Date. It seems to me most
improbable that the parties to this currency swap envisaged that the provision
of details of the sum claimed some two years or more after the Early
Termination Date could ever be within the phrase “on or as soon as
reasonably practicable” following the Early Termination Date.

(ii)Effect of Delayed Notice

Given that the judge came to the
finding that Goldman Sachs’ notice (with the requisite details) was delayed,
the next question was to consider the effect and the consequences of such a
delay: more specifically, whether the delay rendered the notice and the claim
ineffective. Here, the judge interpreted the terms of Clause 6(d) and made a fine
distinction: Goldman Sachs’ notice was not rendered ineffective because it was
not served “on or as soon as reasonably practicable” but that it was merely
rendered “late”. He noted: “… clause 6(d)(ii) states that the sum is payable
when the notice is effective. That requires one to have regard to the purpose
of the notice. When one does so the second notice, albeit late, can be seen to
be effective”.

In rejecting the argument of
Videocon that a delayed notice must necessarily be ineffective resulting in the
fatality of a claim, the judge observed:

19. I consider
this construction to be so lacking in commercial sense that it cannot have been
the meaning which a reasonable person with the background knowledge available
to the parties would have understood the clause to bear. Indeed, it is
difficult to conceive of a reason why the parties would have intended that a
late notice should be an ineffective notice. By contrast there is commercial
sense in a construction pursuant to which a notice is effective if it provides
the paying party with the information required by clause 6(d). That is not to
say that the provision of a late notice, that is, one which is not served “on
or as soon as reasonably practicable” following the Early Termination Date
is devoid of legal consequence. It is a breach of contract and so it may found
an action in damages if the lateness has caused loss. Although [Vidoecon’s
counsel] did not suggest that the lateness in this case has caused any loss I
do not consider that it can be said that lateness can never cause loss. All
will depend upon the circumstances of the case.

20. Finally, my
approach to the construction of clause 6(d) is consistent with the policy of
the court to give effect to, rather than to invalidate, commercial agreements.
…

In sum, although the notice was
delayed, the claim was found to be effective. This was the conclusion arrived
at in summary judgment by the court, although a couple of incidental points
were considered as well.

Analysis

This decision highlights the
difficulties in construing clauses in complex commercial contracts that are not
altogether clear (although the particular term in question was the
run-of-the-mill notice clause). First, for example, it was not evident from the
clause whether the timing requirement of “on or as soon as reasonably
practicable” applied to the first notice of the claim with the calculation of
the amount payable or if it applied both to the calculation as well as the
detailed basis on which it arrived at. The effect of the High Court’s decision
effective subsumes both aspects within the timing requirement.

Second, the judge appears to have adopted
a purposive or even pragmatic construction of the contract to give effect to
the terms. A hyper technical would have rendered Goldman Sachs’ claim
ineffective resulting in consequences, which the judge believes may not have
been intended.

Third, the judge has struck a fine
balance by treating the claim to be effective although it was delayed. But, at
the same time, he allowed Videocon to claim a breach of contract for Goldman
Sachs’ non-compliance with the notice provisions and to claim any loss that may
have occurred to it. Although there was no evidence of such loss caused to
Videocon in this case because of the delay, according to the judge such a possibility
cannot be ruled out as it all depends on the circumstances of the case. Whether
a defendant in such circumstances will be able to claim substantial amount in
damages or whether it will enjoy only a pyrrhic victory is another matter.
After all, it would be cumbersome and costly for the defendant to bring another
action to sustain such a claim in damages.

At a broad level, this decision calls
to attention the importance of greater clarity in drafting some of these
clauses, which tend to occupy less prominence as they are considered “miscellaneous”
or rather procedural in nature, but can become crucial in sustaining or
negating a substantive claim.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

On the first blush, the ‘facts’ as narrated, do not seem to be complete ; hence, are not quite clearly understood.

In one’s view, as a general proposition, however, in case there has been a clean breach of contract obligation on any date, hence a contract agreement, in terms, becomes ‘terminable’ as of that date, then the right to terminate/treat it as terminated by the aggrieved /complainant instantly accrues in his favour. If so, giving a formal notice to the violator, more so simply a delay in doing so, ought not, as perceived, prejudice/negate a claim for damages.

The notice clause is dubiously and clumsily worded, unwittingly or otherwise; and could possibly be looked at as a case of deliberate ‘one-sided agreement’ or inept/incompetent drafting.

Even otherwise, the reasoning of the court in taking the view in favor of the complainant cannot be faulted but may be fully supportable, if were to be judged by the common law principle of ‘natural justice’.

Perhaps, this could be a fit case for urging that ‘intention’ of parties not having been made quite clear or decipherable, doing violence to the ‘wording’ was called for, so as to render justice.In substance,that appears to be the rationale behind the verdict.An instance of,- "Daniel" having come to render justice.

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